Covid-19’s new small business relief plan that President Trump signed this week does not address some weaknesses in the original stimulus legislation that has allowed companies with complicated backgrounds to receive billions of dollars in payments.
The $ 900 billion pandemic aid account includes an additional $ 284 billion for the Paycheck Protection Program to support small businesses. In the previous stimulus, 5.2 million small businesses borrowed $ 525 billion in forgivable loans.
Nearly 1,500 companies that received about $ 2 billion in PPP loans faced allegations of violation of government regulations or criminal conduct, according to an analysis by the Wall Street Journal of loan recipients and news sources.
Another 432 firms laid off workers after getting approved for nearly $ 1 billion in loans, according to an analysis of national layoff notices submitted mainly by large companies by Good Jobs First, a Washington, DC-based nonprofit organization that promotes corporate and governmental responsibility.
The government has accused dozens of people of at least 36 complaints related to fraudulently obtaining coronavirus aid funds, many for allegedly falsifying PPP loan applications and embezzling the funds, according to a review by the Journal of Justice Department.
The original PPP program ignored the typical creditor due diligence to speed up money for distressed companies. Issues such as violation of regulations would likely have been reported in typical loans. Requirements may change when the Small Business Administration determines the application process and the rules for new money. Investigators are just beginning to unravel the questionable loans and potential fraud reports from the first round of PPP.
“Prevention is always better than detection,” said Bruce Dorris, chief executive of the Association of Certified Fraud Examiners. “There will be tens of billions of dollars in fraud that we will encounter in the first round of financing.”
The latest round of PPP financing allows loans of up to $ 2 million for companies with fewer than 300 employees, compared to $ 10 million for employers with a maximum of 500 workers in the first round. Companies must also demonstrate a drop of at least 25% in revenue between comparable quarters in 2019 and 2020 to qualify for the new program.
This time, Congress focused more on helping businesses than on keeping jobs, allowing borrowers to spend funds on a broader range of non-payroll expenses.
The new legislation does not address how the government will check for declines in revenue or whether companies facing litigation or who have violated government regulations should be eligible. The project gives the SBA 10 days to implement the changes.
Up to four million small businesses could be lost in 2020, analysts say, as the pandemic affects local economies. WSJ visits Yuma, Arizona, where small business owners say another round of Congressional stimulus may be too late. Photo: Adam Younker for The Wall Street Journal
“You won’t be able to get a mortgage unless you can prove that you earn a certain amount of money,” said Ann Gittleman, managing director of Duff & Phelps, a multinational financial advisory firm. “I would have assumed that there would be more documentation required on this return.”
An SBA spokeswoman said the agency was working quickly to update the rules for PPP borrowers and lenders.
The Journal’s analysis is based on data from all 5.2 million PPP recipients released in response to a lawsuit filed by news organizations, including the Journal’s publisher, Dow Jones & Co. The Journal combined names listed in the database. PPP data for news published since 2012 detailing court cases and allegations of violations of government regulations from news sources. The correspondence was confirmed by comparing the address listed on the loan with the company’s publicly disclosed locations, identified in news articles.
The data includes details not previously released of 4.5 million beneficiaries who have borrowed less than $ 150,000. These smaller borrowers accounted for 28% of the $ 525 billion distributed between April and August.
The nearly 1,500 companies with troubled backgrounds received loans worth an average of $ 526,000 to support an average of 36 jobs. Nearly 400 of these companies have borrowed at least $ 1.5 million, including a televangelist cautioned by authorities for allegedly promoting fake treatments for coronavirus and a private equity firm accused by investors and a state securities regulator of running a Ponzi scheme , according to the newspaper.
Many of the loan beneficiaries have been accused of more common commercial violations.
PPP’s role in Covid Aid
Rhode Island-based Madeira Restaurant Inc. received a $ 143,000 PPP loan in April. The U.S. Department of Labor filed a lawsuit against the restaurant in 2019, accusing it of violating the Fair Labor Standards Act by withholding overtime pay from employees who worked more than 40 hours a week. In May, a court ordered the restaurant to pay employees $ 40,000 in back wages and severance pay.
The restaurant staff mentioned in the complaint either declined to comment or could not be reached.
In November, the SBA announced that it would audit companies that received loans of $ 2 million or more. The new legislation also increases the SBA’s supervisory authority and allocates an additional $ 50 million for future audits. The new bill prevents public companies from participating and requires disclosures from some government officials who have received loans, but does not describe the documentation requirements for borrowers.
The SBA is working with investigators to recover funds from obvious fraud, but loans that are almost inadequate will require other remedies, such as fines, said Tarek Helou, a former Justice Department prosecutor who is now a partner at Wilson Sonsini Goodrich & Rosati.
“Someone who lies about having a company and buying a Lamborghini is clearly a crime,” said Helou. “Someone who is not sure what will happen to your company in a week or two because he is receiving different sources of information about his earnings … Should that person go to jail? I think not.”
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Porch.com, which obtained a $ 8 million PPP loan in April, illustrates three different gray areas of the law. The software provider for home services and moving companies is being sued for allegedly violating federal no-call rules, according to court records.
The company’s founder and CEO, Matt Ehrlichman, said that Porch.com was fighting the process and that the text messaging system in question was no longer in use.
Porch.com also benefited from the housing boom this year, with revenue estimated at $ 120 million next year, up from $ 36 million in 2018, according to a July press release.
When the company applied for the loan, the situation was very different. Transaction volume “fell off a cliff when the pandemic hit” and layoffs were a possibility without the loan, said Ehrlichman.
The company took advantage of its recovery for a merger with a blank check investment firm that closed on Christmas Eve. The deal gave Porch.com $ 323 million in new capital and a listing of Nasdaq shares.
“I would love to give credit and thank the government,” said Ehrlichman. “I think Porch is a great example of the intent of the entire program.” He did not say whether the company would return the PPP money.
Write to Shane Shifflett at [email protected]
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